Smith v. Van Gorkom

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Smith v. Van Gorkom or the Trans Union case, 488 A.2d 858 (Supreme Court of Delaware, 1985) is an important Delaware Supreme Court decision, primarily because of its discussion of a director's duty of care.

The case involved a proposed leveraged buy-out merger of TransUnion by Marmon Group which was controlled by Jay Pritzker.^[1] Defendant Jerome Van Gorkom, who was the company's Chairman and CEO, chose a proposed price of $55 without consultation with outside financial experts. He only consulted with the company's CFO, and that consultation was to determine a per share price that would work for a leveraged buyout.^[1] Van Gorkom and the CFO did not determine an actual total value of the company.^[1] The court was highly critical of this decision, writing that "the record is devoid of any competent evidence that $55 represented the per share intrinsic value of the Company."

The proposed merger was subject to Board approval. At the Board meeting, a number of items were not disclosed, including the problematic methodology that Van Gorkom used to arrive at the proposed price. Also, previous objections by management were not discussed. The Board approved the proposal.

The Court found that the directors were grossly negligent, because they quickly approved the merger without substantial inquiry or any expert advice. For this reason, the board of directors breached the duty of care that it owed to the corporation's shareholders. As such, the protection of the business judgment rule was unavailable.

The Court stated: “The rule itself ‘is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’ ...Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one.” (872). Furthermore, the court rejected defendant's argument that the substantial premium paid over the market price indicated that it was a good deal. In so doing, the court noted the irony that the board stated that the decision to accept the offer was based on their expertise, while at the same time asserting that it was proper because the price offered was a large premium above market value.

The decision also clarified the directors' duty of disclosure, stating that corporate directors must disclose all facts germane to a transaction that is subject to a shareholder vote.

The case prompted an outcry from boards of directors of public companies, a sharp increase in insurance premiums for directors and officers' insurance, and the eventual adoption by the Delaware legislature of a statutory provision (Delaware General Corporation Law 102(b)(7)) that permits Delaware companies (with shareholder approval) to adopt charter amendments that exculpate directors from personal liability for breaches of the duty of care. Nine out of 10 Delaware companies have by this method essentially overturned the result in the Van Gorkom case. Nevertheless, the case lives on as a reminder that directors should take reasonable actions to inform themselves before acting.

After the court's decision to remand the case back to the Court of Chancery the defendants agreed to a settlement.^[1] The directors agreed to pay $23.5 million in damages, of which $10 million was covered by insurance with Pritzker then paying the remainder of the settlement even though he was not a party to the lawsuit.^[1] Pritzker paid as he did not agree with the court and some of the defendants were unable to pay the settlement.^[1]